Updated: Oct 9, 2020
How the owner of a “company on paper” stunts their growth and gets in their own way.
So one of the things we see dozens of times a week here at Diaspora Freedom Initiative is, clients that paid someone to register their company or they did it themselves & are running into problems that are stalling their growth.
There’s a reason why there’s no option to just get a company/corporation registered on our site & the reason is that we’re not here to get in the way of your business we’re here to help you grow. So in this blog, we’re going to break down to you why registration is just the first step & how if you don’t understand that fully you’re setting yourself up for failure.
First, we have to take a look at why should one register at all?
The answer is quite simple & spoiler alert no it's not “Well it depends on the kind of business you’re in”… We register a company or corporation for Limited Liability. All registered companies or corporations have Limited Liability, not just LLC’s. Also, it’s not just legal liability it’s also tax liability & debt liability. There are more Limited Liabilities but they go beyond the scope of this blog.
There are six types of businesses & five of them are companies or corporations. They are:
1. Sole-proprietorship – This type of business has no limited liability protecting & is under most circumstances the worst way to conduct business, period. This type of business has UNLIMITED liability, UNLIMITED! We really don’t need to say any more about that so, we won't.
2. LLC/P – Limited Liability Company/Partnership – The LLC has the flexibility of the sole-proprietorship with the protection from liability of a corporation. It can also be taxed as a sole-proprietorship or any other corporate tax type, meaning it can be taxed as a C-corp, S-corp & yes contrary to popular belief as a Nonprofit. LLP’s are simply LLC’s with more than one member (which is LLC language for the owner). So, one owner = LLC, 2 or more owners = LLP (Note that some States will use LLP to denote Professional instead of Partnership.) This is the most popular type of business structure for new businesses
3. PC/PLLC/PLLP – This is the #1 mistake that DIYers make we correct the registration of about 12 - 18 LLC’s per month that should have been PC or PLLC (the difference is that some states say PC and some say PLLC) the “P” stands for Professional so a PC is a Professional Company which has nothing to do with your work ethic. The general rule is if you need a license to do whatever it is you are doing then you’re probably a PC. If the law requires you to be a Certified "X" or a Licensed "X" then there’s a good chance it also requires you to have a Professional Company if you’re going to have a company. A PC may have additional restrictions by law however the carry limited liability & the same tax freedom as an LLC.
4. C-Corp – The C Corporation is the most attractive model for high level investing. In The Diaspora Freedom Initiative mentorship, we jokingly say that C stands for cash. C-Corps are taxed at the corporate level which means that double taxation is a downside. You also have less control as shareholders don’t manage the corporation in general. On the upside, however, C-corps can have unlimited owners, Free transferability of shares, as a corporation, it has perpetual existence, and as the oldest type of formation the corporate law is solid, most challenges have already come up in court & you know exactly what you can & can’t do. The biggest advantage to a corporation big enough to want to be a C-corp is arguably its ability to run a wide variety of tax planning systems that reduce & in some cases even legally eliminate the double taxation mentioned above.
5. S-Corp – An S-Corp AKA a Subchapter Corporation allows for 100 or fewer owners to be taxed as if they were in a partnership. Credits to shareholders, losses, deductions, and business income may be passed through to the ownership (shareholders). The shareholders can file the income and losses on individual tax returns, and pay regular tax rates. This is the most restrictive for-profit corporate formation style. While this may sound like a downside because some trusts & estates can be shareholders it can be the most secure formation one could have if they have a trust that owns their assets. The specifics of which are beyond the scope of this blog. The S-Corp is sometimes called the State Corp because it DOES NOT pay federal taxes at the entity level. It’s also sometimes referred to as the Salary Corp because shareholders can & are encouraged to be employees who earn Salaries & receive tax-free corporate dividends. As a downside, because an S-Corp can try to cheat on payroll tax via dividend distributions the S-corp has restrictions on how salaries are formulated so you don’t have the freedom to pay a low salary and make it up later on profitability.
6. Non-profit Corporation – This is probably the most misunderstood of the corporate classes. A nonprofit corporation is an entity organized in a state for social, educational, recreational, or charitable purposes by like-minded citizens either partly or completely. That’s it, end of definition…
What most people call a Nonprofit is an entity that has applied for and received a determination from the IRS that it is tax-exempt under certain circumstances. While the most common determination people reference is the 501c3 there are dozens of other federal tax-exempt statuses and going into them is well beyond the scope of this blog. For the purposes of a simplistic overview, we’ll say that Nonprofits have no owners and are managed in trust, and have very clear guidelines on how their internal organization must be structured. We DO NOT recommend that you attempt to register a Nonprofit that is seeking an IRS determination by yourself, seek out a professional organization.
So now you’re registered and as we said, in the beginning, this is where people get in their own way. In order for you to truly operate as a company or corporation. Some financial institutions, all grants & investors, & even some local governments where you may need a business license are going to ask you for three things:
1. Your Certificate of Formation or Articles of Incorporation
2. You Operating Agreement if you’re a company or bylaws if you’re a corporation
3. Your EIN
Registering gave you #1 & maybe you went and got #3 for free on the IRS website but where’s #2? This is the document that clients who come to us after DIY incorporating or paying a low end incorporating service, are most commonly missing. Not only that, they are normally missing their entire corporate kit. That means they have no stock certificates, no corporate seal, no minutes, nothing a real company would have. This is part of the reason why according to a report published by CBS 95% of Black-owned businesses couldn’t even apply for PPP grants or loans because they were just a company on paper and nothing more. It’s a trend that we have to break!
*Now here’s the giveaway, in an effort to give back to the community if you go to our website & sign up on the home page you’ll receive an email from us. If you reply to that email that you "need your operating agreement (LLC/P/PC) or bylaws (S-corp, C-corp,-Nonprofit)" we will get you taken care of free of charge! Click here to fill it out and get your free customizable company/corporate documents! We do it for the Culture!